Jeremy Warner's Outlook: European equity trading will gravitate to London anyway, so LSE needs no deal

Tesco comes under regulatory siege; Terminal problems for BAA
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The Independent Online

Deutsche Börse has in any case already been pretty much ruled offside after a revolt by its own shareholders. Any lingering hope directors might have had of re-entering the fray have been dashed by the report, which demands that Deutsche largely divest itself of its clearing and settlement functions as a condition of any deal.

The same goes for Euronext, which is required to reduce its economic interest in LCH.Clearnet from 41.5 per cent to less than 15 per cent. This is not quite the deal breaker for the owner of the Paris bourse as it is for Deutsche, but it does mean that in order to proceed Euronext would have to take a considerable write-down on its investment in clearing and settlement functions. There are few natural buyers for these assets.

This makes Euronext shareholders all the less keen on paying the big cash premium demanded for control of the LSE. A nil-premium all shares "merger" might seem to have some merit, as it would allow LSE shareholders to share in the €200m of synergies Euronext expects to derive from the deal, but it would fail utterly to recognise the value of such a key strategic asset.

Anyone with half a brain can see that European equity trading will in any case eventually gravitate to London, which is where Europe's other capital markets are already concentrating. Both Deutsche Börse and Euronext have been cleverer than the LSE at diversifying away from cash equity trading, particularly into fast-growing derivative markets, and have thereby made themselves larger businesses than the LSE.

But there is no doubt which ultimately is the more important exchange. The LSE doesn't need to merge with Euronext, Deutsche Börse, or anyone else for that matter. Barring another bout of mismanagement, which with the LSE should never altogether be discounted, or some dim-witted government assault, the LSE is supremely well placed to do just fine on its own.

Consolidate or be consolidated, has been the rallying call of European exchanges, yet actually it is much better that consolidation occurs through rival exchanges competing for each other's business than by taking each other over. In this process, London is likely to be the clear winner, which is why everyone is so keen to buy her stock exchange. So the war goes on.

Tesco comes under regulatory siege

The big supermarket chains have been more investigated by the competition authorities than any other industry in the land. Yet, perhaps oddly, regulators have not yet thought it desirable to interfere with the inexorable rise of Tesco, with more than 30 per cent of the market at the last count.

This represents a welcome outbreak of common sense, for dominant though Tesco now is, the effect has been largely benign. The company has earned every penny of its business success. Nobody likes the way the big supermarket chains have decimated the little guy on the high street, but you cannot quarrel with the prices, choice and convenience of it all.

Far from opposing the opening of a new Tesco superstore in their vicinity, most consumers welcome it. It forces others to lower their prices and raise their game.

Yet you can always have too much of a good thing, and the worry is that Tesco has already reached that point. As our story on page 60 shows, the Office of Fair Trading is facing growing pressure for action, though it has proved resistant to date. Philip Hampton, the chairman of J Sainsbury, is just the latest to demand it. Well he would do, wouldn't he, Tesco might say with some justification. Whingeing to the regulator is what business losers do when they have been out-traded.

Lee Scott, the chief executive of Wal-Mart, has also expressed concerns, which is a bit rich coming from a company which adds more space globally in a year than Tesco's entire portfolio of UK stores, though he's yet to complain formally to the OFT.

Instead he's letting more vulnerable players do the direct lobbying. Sainsbury's point is a simple one. If you look at the size of the Tesco land bank and its present rate of planning approvals, then within six years the company will have a market share approaching 45 per cent. In the past 12 weeks, according to industry estimates, it has already achieved 36 per cent of till-take at stores of more than 15,000 square feet.

Interestingly, Tesco's own stated growth ambitions don't markedly disagree. Tesco aims to expand its UK retail space by about 6 per cent a year, which even allowing for growth in the market, would take the company's share to something over 40 per cent, certainly within six years and possibly sooner.

The reason this is potentially dangerous is that any company once it reaches this level of market dominance can dictate prices. Rather than driving prices down, Tesco might be tempted to reverse the present trend and start driving them up, for where Tesco leads, everyone else will follow.

Mr Hampton wants store development by supermarket chains to be looked at in the same way by the competition regulators as store acquisition. Tesco has found even quite small store acquisitions blocked on the grounds that they would deliver local monopoly. The same approach could be applied to store development.

Unfair or inspired? The idea is hardly a new one, but in the past it has always been rejected on the grounds that it would be oppressive to try to curtail a company's organic growth. Has the time come for a rethink?

Tesco's Sir Terry Leahy - always measured, reasonable and single minded in his style - will plainly be arguing his corner with vigour, but even he acknowledges there must be limits, whether imposed or natural, to ability to grow in any one market.

That's why he's investing so much in overseas expansion. Yet it means that from here on in the company's growth gets higher risk. Wal-Mart has a home franchise of unparalleled size and power to spread its wings from. Tesco's home market is minuscule by comparison, providing less of a cushion against mistakes. Small wonder the share price is below its best.

Terminal problems for BAA

The airports operator BAA has decided its airline customers deserve a better deal. It is going to be paid for by staff at Heathrow, Gatwick and Stansted, 700 of whom are being got rid of, by compulsory means if necessary, to produce the cost savings that will enable BAA to lower its landing charges. So far, so lean and mean.

But if BAA reckons this small olive branch is going to buy off the bigger revolt it is facing over the funding of a second runway at Stansted it had better think again. Stansted's users, principally the low-cost carrier Ryanair, do not much fancy the idea of forking out up to £4bn for what Michael O'Leary, Ryanair's chief executive, calls the aviation equivalent of the Taj Mahal. The airlines at Heathrow and Gatwick, meanwhile, have warned BAA that it can expect the mother of all rows if they are forced to cross-subsidise a second Stansted runway.

The simplest solution would be to junk the second runway at Stansted and build a third one instead at Heathrow, where there would be no shortage of backers among the airlines. This is the option Tony Blair might have plumped for had there not been an election in the offing. Whether he feels any braver now remains to be seen.

j.warner@independent.co.uk

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